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EX-18 - EXHIBIT 18 - LSI INDUSTRIES INCex18.htm
EX-31.2 - EXHIBIT 31-2 - LSI INDUSTRIES INCex31-2.htm
EX-31.1 - EXHIBIT 31-1 - LSI INDUSTRIES INCex31-1.htm
EX-32.1 - EXHIBIT 32-1 - LSI INDUSTRIES INCex32-1.htm
EX-32.2 - EXHIBIT 32-2 - LSI INDUSTRIES INCex32-2.htm
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q
 
X
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011.
 
       
   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________.
 
 
Commission File No. 0-13375

LSI Industries Inc.

State of Incorporation - Ohio        IRS Employer I.D. No. 31-0888951

10000 Alliance Road

Cincinnati, Ohio  45242

(513) 793-3200

Indicate by checkmark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  YES    X     NO ____

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ____  NO ____

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer [    ]  
 
Accelerated filer [ X ]
 
Non-accelerated filer [    ] 
 
Smaller reporting company [    ]
 
Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ____  NO    X

As of April 29, 2011 there were 24,047,752 shares of the Registrant's common stock outstanding.
 
 
 

 
 
LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2011

INDEX
 
   
Begins on Page
PART I.  Financial Information
   
         
 
ITEM 1.
Financial Statements
   
         
   
Condensed Consolidated Statements of Operations
 
3
   
Condensed Consolidated Balance Sheets
 
4
   
Condensed Consolidated Statements of Cash Flows
 
5
         
   
Notes to Condensed Consolidated Financial Statements
 
6
         
 
ITEM 2.
Management’s Discussion and Analysis
   
   
  of Financial Condition and Results of Operations
 
20
         
 
ITEM 3.
Quantitative and Qualitative Disclosures About
   
   
  Market Risk
 
34
         
 
ITEM 4.
Controls and Procedures
 
34
         
PART II.  Other Information
   
         
 
ITEM 2.
Unregistered Sales of Equity Securities and Use
   
   
  of Proceeds
 
34
         
 
ITEM 6.
Exhibits
 
35
         
Signatures
 
35
 
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

This Form 10-Q contains certain forward-looking statements that are subject to numerous assumptions, risks or uncertainties.  The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.  Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “may,” “will,” “should” or the negative versions of those words and similar expressions, and by the context in which they are used.  Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made.  Actual results could differ materially from those contained in or implied by such forward-looking statements as a result of a variety of risks and uncertainties over which the Company may have no control.  These risks and uncertainties include, but are not limited to, the impact of competitive products and services, product demand and market acceptance risks, potential costs associated with litigation and regulatory compliance, reliance on key customers, financial difficulties experienced by customers, the cyclical and seasonal nature of our business, the adequacy of reserves and allowances for doubtful accounts, fluctuations in operating results or costs whether as a result of uncertainties inherent in tax and accounting matters or otherwise, unexpected difficulties in integrating acquired businesses, the ability to retain key employees of acquired businesses, unfavorable economic and market conditions, the results of asset impairment assessments and the other risk factors that are identified herein.  You are cautioned to not place undue reliance on these forward-looking statements.  In addition to the factors described in this paragraph, the risk factors identified in our Form 10-K and other filings the Company may make with the SEC constitute risks and uncertainties that may affect the financial performance of the Company and are incorporated herein by reference.  The Company does not undertake and hereby disclaims any duty to update any forward-looking statements to reflect subsequent events or circumstances.
 
 
Page 2

 
 
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
   
Nine Months Ended
 
   
March 31
   
March 31
 
(In thousands, except per share data)
 
2011
   
2010
   
2011
   
2010
 
                                 
Net sales
 
$
64,628
   
$
53,466
   
$
219,284
   
$
190,516
 
                                 
Cost of products and services sold
   
48,304
     
43,954
     
163,691
     
148,107
 
Loss on sale of a subsidiary
   
--
     
639
     
--
     
639
 
    Total cost of products and services sold
   
48,304
     
44,593
     
163,691
     
148,746
 
                                 
         Gross profit
   
16,324
     
8,873
     
55,593
     
41,770
 
                                 
Selling and administrative expenses
   
13,841
     
12,687
     
41,839
     
40,154
 
                                 
     Operating income (loss)
   
2,483
     
(3,814
)
   
13,754
     
1,616
 
     
                               
Interest (income)
   
(29
)
   
(4
)
   
(53
)
   
(11
)
                                 
Interest expense 
   
40
     
37 
     
124
     
110
 
                                 
     Income (loss) before income taxes
   
2,472
     
(3,847
)
   
13,683
     
1,517
 
                                 
Income tax (benefit) expense
   
357
     
(1,315
)
   
4,352
     
820
 
     
                               
     Net income (loss)
 
 $
2,115
   
 $
(2,532
)
 
 $
9,331
   
 $
697
 
     
                               
                                 
Earnings (loss) per common share (see Note 5)
                               
     Basic
 
$
0.09
   
$
(0.10
)
 
0.38
   
0.03
 
     Diluted
 
$
0.09
   
$
(0.10
)
 
$
0.38
   
0.03
 
                                 
                                 
Weighted average common shares outstanding
                               
     Basic
   
24,291
     
24,277
     
24,286
     
24,078
 
     Diluted
   
24,363
     
24,277
     
24,331
     
24,085
 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
 
 
Page 3

 
 
LSI INDUSTRIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
(In thousands, except share amounts)                                       
 
March 31,
   
June 30,
 
   
2011
   
2010
 
ASSETS
           
             
Current Assets
           
Cash and cash equivalents
 
$
9,583
   
$
17,417
 
Accounts and notes receivable, net
   
37,866
     
35,254
 
Inventories
   
55,535
     
40,082
 
Refundable income taxes
   
349
     
1,146
 
Other current assets
   
4,735
     
5,512
 
Total current assets
   
108,068
     
99,411
 
                 
Property, Plant and Equipment, net
   
44,870
     
44,911
 
                 
Goodwill, net
   
10,766
     
10,766
 
                 
Other Intangible Assets, net
   
13,162
     
15,103
 
                 
Other Long-Term Assets, net
   
3,836
     
3,654
 
                 
Total assets
 
$
180,702
   
$
173,845
 
                 
LIABILITIES & SHAREHOLDERS’ EQUITY
               
                 
Current Liabilities
               
Current maturities of long-term debt
 
$
34
   
$
33
 
Accounts payable
   
14,733
     
12,553
 
Accrued expenses
   
11,909
     
13,257
 
Total current liabilities
   
26,676
     
25,843
 
                 
Other Long-Term Liabilities
   
3,288
     
3,784
 
Commitments and contingencies (Note 13)
   
--
     
--
 
                 
Shareholders’ Equity
               
Preferred shares, without par value;
               
Authorized 1,000,000 shares; none issued
   
--
     
--
 
Common shares, without par value;
               
Authorized 40,000,000 shares;
               
   Outstanding 24,046,681 and 24,045,502
               
shares, respectively
   
100,758
     
99,963
 
Retained earnings
   
49,980
     
44,255
 
Total shareholders’ equity
   
150,738
     
144,218
 
                 
Total liabilities & shareholders’ equity
 
$
180,702
   
$
173,845
 
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
 
 
Page 4

 
 
LSI INDUSTRIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
(In thousands)
 
Nine Months Ended
 
   
March 31
 
   
2011
   
2010
 
Cash Flows from Operating Activities
           
Net income
 
$
9,331
   
$
697
 
Non-cash items included in net income
               
Depreciation and amortization
   
5,886
     
5,903
 
Loss on sale of a subsidiary
   
--
     
639
 
Deferred income taxes
   
(347
)
   
(27
)
Deferred compensation plan
   
90
     
5
 
Stock option expense
   
708
     
1,102
 
Issuance of common shares as compensation
   
32
     
36
 
Loss on disposition of fixed assets
   
52
     
28
 
Allowance for doubtful accounts
   
139
     
(124
)
Inventory obsolescence reserve
   
628
     
300
 
                 
Changes in certain assets and liabilities, net of acquisition
               
Accounts and notes receivable
   
(2,751
)
   
2,581
 
Inventories
   
(16,081
)
   
1,769
 
Refundable income taxes
   
797
     
494
 
Accounts payable and other
   
2,276
     
(446
)
Customer prepayments
   
(972
)
   
(709
)
Net cash flows provided by (used in) operating activities
   
(212
)
   
12,248
 
                 
Cash Flows from Investing Activities
               
Purchases of property, plant and equipment
   
(4,001
)
   
(4,572
)
Proceeds from sale of fixed assets
   
45
     
505
 
Acquisition of business, net of cash received
   
--
     
(675
)
Net cash flows (used in) investing activities
   
(3,956
)
   
(4,742
)
                 
Cash Flows from Financing Activities
               
Payment of long-term debt
   
(25
)
   
(2,230
)
Cash dividends paid
   
(3,606
)
   
(3,606
)
Exercise of stock options
   
59
     
--
 
Purchase of treasury shares
   
(111
)
   
(102
)
Issuance of treasury shares
   
17
     
75
 
Net cash flows (used in) financing activities
   
(3,666
)
   
(5,863
)
                 
Increase (decrease) in cash and cash equivalents
   
(7,834
)
   
   1,643
 
                 
Cash and cash equivalents at beginning of year
   
17,417
     
13,986
 
                 
Cash and cash equivalents at end of period
 
$
9,583
   
$
15,629
 
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
 
 
Page 5

 
 
LSI INDUSTRIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1  -  INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.  In the opinion of Management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of March 31, 2011, the results of its operations for the three month and nine month periods ended March 31, 2011 and 2010, and its cash flows for the nine month periods ended March 31, 2011 and 2010. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2010 Annual Report on Form 10-K.  Financial information as of June 30, 2010 has been derived from the Company’s audited consolidated financial statements.

NOTE 2  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation:

The consolidated financial statements include the accounts of LSI Industries Inc. (an Ohio corporation) and its subsidiaries, all of which are wholly owned.  All intercompany transactions and balances have been eliminated in consolidation.

Revenue Recognition:

Revenue is recognized when title to goods and risk of loss have passed to the customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services have been rendered, and collectibility is reasonably assured.  Revenue from product sales is typically recognized at time of shipment.  In certain arrangements with customers, as is the case with the sale of some of our solid-state LED (light emitting diode) video screens, revenue is recognized upon customer acceptance of the video screen at the job site.  Sales are recorded net of estimated returns, rebates and discounts. Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses.

The Company has four sources of revenue:  revenue from product sales; revenue from installation of products; service revenue generated from providing integrated design, project and construction management, site engineering and site permitting; and revenue from shipping and handling.

Product revenue is recognized on product-only orders upon passing of title and risk of loss, generally at time of shipment.  However, product revenue related to orders where the customer requires the Company to install the product is recognized when the product is installed.  Other than normal product warranties or the possibility of installation or post-shipment service, support and maintenance of certain solid state LED video screens, billboards, or active digital signage, the Company has no post-shipment responsibilities.
 
Installation revenue is recognized when the products have been fully installed.  The Company is not always responsible for installation of products it sells and has no post-installation responsibilities, other than normal warranties.

Service revenue from integrated design, project and construction management, and site permitting is recognized when all products have been installed at each individual retail site of the customer on a proportional performance basis. 

Shipping and handling revenue coincides with the recognition of revenue from sale of the product.

The Company evaluates the appropriateness of revenue recognition in accordance with Accounting Standards Codification (ASC) Subtopic 605-25, Revenue Recognition:  Multiple–Element Arrangements, and ASC Subtopic 985-605, Software:  Revenue Recognition.  Our solid-state LED video screens, billboards and active digital signage contain software elements which the Company has determined are incidental and essential to the functionality of the tangible product and are thus excluded from the scope of ASC Subtopic 985-605.
 
 
Page 6

 

Credit and Collections:

The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments.  If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income.  The Company determines its allowance for doubtful accounts by first considering all known collectibility problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date of the remaining receivables.  The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, and historical trends.  The Company also establishes allowances, at the time revenue is recognized, for returns, discounts, pricing and other possible customer deductions.  These allowances are based upon historical trends.

The following table presents the Company’s net accounts and notes receivable at the dates indicated.
 
(In thousands)
 
March 31,
   
June 30,
 
   
2011
   
2010
 
             
Accounts and notes receivable
 
$
38,404
   
$
35,653
 
less Allowance for doubtful accounts
   
(538
)
   
(399
)
Accounts and notes receivable, net
 
$
37,866
   
$
35,254
 

Cash and Cash Equivalents:

The cash balance includes cash and cash equivalents which have original maturities of less than three months.  The Company maintains balances at financial institutions in the United States and Canada.  The balances at financial institutions in Canada are not covered by insurance.  As of March 31, 2011 and June 30, 2010, the Company had bank balances of $4,706,000 and $18,530,000, respectively, in excess of FDIC insured limits and therefore without insurance coverage.

Inventories:

Inventories are stated at the lower of cost or market.  Cost is determined on the first-in, first-out basis.

Property, Plant and Equipment and Related Depreciation:

Property, plant and equipment are stated at cost.  Major additions and betterments are capitalized while maintenance and repairs are expensed.  For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows:
 
Buildings
28 - 40 years
Machinery and equipment
3 - 10 years
Computer software
3 -   8 years
 
Costs related to the purchase, internal development, and implementation of the Company’s fully integrated enterprise resource planning/business operating software system are either capitalized or expensed in accordance with ASC Subtopic 350-40, Intangibles – Goodwill and Other:  Internal-Use Software.  Leasehold improvements are depreciated over the shorter of fifteen years or the remaining term of the lease.

The following table presents the Company’s property, plant and equipment at the dates indicated.
 
(In thousands)
 
March 31,
   
June 30,
 
   
2011
   
2010
 
             
Property, plant and equipment, at cost
 
$
 112,137
   
$
108,873
 
less Accumulated depreciation
   
(67,267
)
   
(63,962
)
Property, plant and equipment, net
 
$
44,870
   
$
44,911
 
 
 
Page 7

 

The Company recorded $1,297,000 and $1,327,000 of depreciation expense in the third quarter of fiscal 2011 and 2010, respectively, and $3,945,000, and $3,995,000 of depreciation expense in the first nine months of fiscal 2011 and 2010, respectively.

Intangible Assets:

Intangible assets consisting of customer relationships, trade names and trademarks, patents, technology and software, and non-compete agreements are recorded on the Company's balance sheet.  The definite-lived intangible assets are being amortized to expense over periods ranging between two and twenty years.  The Company periodically evaluates definite-lived intangible assets for permanent impairment. Neither indefinite-lived intangible assets nor the excess of cost over fair value of assets acquired ("goodwill") are amortized, however they are subject to review for impairment.  See additional information about goodwill and intangibles in Note 8.

Fair Value of Financial Instruments:

The Company has financial instruments consisting primarily of cash and cash equivalents, revolving lines of credit, and long-term debt.  The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.  The Company has no financial instruments with off-balance sheet risk.
 
Product Warranties:

The Company offers a limited warranty that its products are free of defects in workmanship and materials.  The specific terms and conditions vary somewhat by product line, but generally cover defective products returned within one to five years from the date of shipment.  The Company records warranty liabilities to cover the estimated future costs for repair or replacement of defective returned products as well as products that need to be repaired or replaced in the field after installation.  The Company calculates its liability for warranty claims by applying estimates to cover unknown claims, as well as estimating the total amount to be incurred for known warranty issues.  The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Company’s warranty liabilities, which are included in accrued expenses in the accompanying consolidated balance sheets, during the periods indicated below were as follows:
 
   
Nine
   
Nine
   
Fiscal
 
   
Months Ended
   
Months Ended
   
Year Ended
 
(In thousands)
 
March 31,
   
March 31,
   
June 30,
 
   
2011
   
2010
   
2010
 
                   
Balance at beginning of the period
 
$
589
   
$
223
   
$
223
 
Additions charged to expense
   
1,256
     
1,135
     
1,870
 
Addition from acquisition
   
--
     
5
     
5
 
Deductions for repairs and
                       
Replacements
   
(1,165
)
   
(974
)
   
(1,509
)
Balance at end of the period
 
$
680
   
$
389
   
$
589
 

Research and Development Costs:

Research and development expenses are costs directly attributable to new product development, including the development of new technology for both existing and new products, and consist of salaries, payroll taxes, employee benefits, materials, supplies, depreciation and other administrative costs.  All costs are expensed as incurred and are classified as operating expenses.  The Company follows the requirements of ASC Subtopic 985-20, Software:  Costs of Software to be Sold, Leased, or Marketed, by expensing as research and development all costs associated with development of software used in solid-state LED products.  Research and development costs incurred related to both product and software development totaled $1,103,000, and $1,209,000 for the three month periods ended March 31, 2011 and 2010, respectively, and $3,846,000 and $3,662,000 for the nine month periods ended March 31, 2011 and 2010, respectively.

Earnings Per Common Share:

The computation of basic earnings per common share is based on the weighted average common shares outstanding for the period net of treasury shares held in the Company’s non-qualified deferred compensation plan.  The computation of diluted earnings per share is based on the weighted average common shares outstanding for the period and includes common share equivalents.  Common share equivalents include the dilutive effect of stock options, contingently issuable shares and common shares to be issued under a deferred compensation plan, all of which totaled 316,000 shares and 233,000 shares for the three month periods ended March 31, 2011 and 2010, respectively, and 285,000 shares and 240,000 shares for the nine month periods ended March 31, 2011 and 2010, respectively.  See further discussion in Note 5.
 
 
Page 8

 

New Accounting Pronouncements:

In October 2009, the Financial Accounting Standards Board issued ASU 2009-14, "Certain Revenue Arrangements That Include Software Elements." This amended guidance clarifies when revenue can be recognized when tangible products contain both software and non-software components in a multiple deliverable arrangement. This update was effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company adopted the amended guidance on July 1, 2010. There was no impact on the consolidated results of operations, cash flows or financial position as a result of the amended guidance.

 
In October 2009, the Financial Accounting Standards Board issued ASU 2009-13, "Multiple Deliverable Revenue Arrangements." This amended guidance enables companies to account for products or services (deliverables) separately rather than as a combined unit in certain circumstances. Accounting Standards Codification Subtopic 605-25, Revenue Recognition: Multiple-Element Arrangements, established the accounting and reporting guidance for arrangements under which the vendor will perform multiple revenue-generating activities. The Subtopic addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The amended guidance was effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company adopted the amended guidance on July 1, 2010. There was no impact on the consolidated results of operations, cash flows or financial position as a result of the amended guidance.

Comprehensive Income:

The Company does not have any comprehensive income items other than net income.

Subsequent Events:

The Company has evaluated subsequent events for potential recognition and disclosure through the date the condensed consolidated financial statements were filed.  No items were identified during this evaluation that required adjustment to or disclosure in the accompanying financial statements.

Reclassifications:

Certain reclassifications may have been made to prior year amounts in order to be consistent with the presentation for the current year.  For segment reporting, the Technology Segment has been reclassified into the All Other Category and Corporate Administration has been separately stated. See further discussion in Note 4.

Use of Estimates:

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

NOTE 3  -  MAJOR CUSTOMER CONCENTRATIONS

The Company’s Lighting Segment and Graphics Segment net sales to 7-Eleven, Inc. represented approximately $7,254,000 or 14% of consolidated net sales in the three months ended March 31, 2010, and $38,639,000 or 18% and $33,055,000 or 17% of consolidated net sales in the nine months ended March 31, 2011 and 2010, respectively.  There was no concentration of accounts receivable at March 31, 2011 or June 30, 2010.

NOTE 4  -  BUSINESS SEGMENT INFORMATION

Accounting Standards Codification Topic 280, Segment Reporting, establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in interim financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s President and Chief Executive Officer) in making decisions on how to allocate resources and assess performance. While the Company has twelve operating segments, it has only three reportable operating business segments (Lighting, Graphics, and Electronic Components), an All Other Category, and Corporate Administration.
 
 
Page 9

 
 
The Company made changes to its reportable business segments in fiscal 2011.  The Technology Segment was reclassified into the All Other Category because there were no quantitative measures or qualitative factors that required the operating results of LSI Saco Technology to be reported in a separate business segment.  The Company also reclassified its Corporate Administration and intercompany eliminations out of the All Other Category and into a separate line item in the business segment disclosures because this presents a more appropriate disclosure of operating income (loss) of the All Other Category.  Additionally, the Company reclassified an indefinite lived trade name intangible asset and its related intercompany royalty income from the Corporate Administration balance sheet and operating results to the balance sheet and operating results of the Lighting Segment.  Also, certain definite lived LED technology intangible assets and related amortization expenses were reclassified from the Corporate Administration balance sheet and operating results to the balance sheets and operating results of the Lighting Segment and the Graphics Segment.  All intercompany royalty income related to these LED technology intangible assets has been reclassified from the Corporate Administration operating results to the Graphics Segment operating results.  The changes described in this paragraph were made for all reported periods in these financial statements, and they had no impact on the Company’s consolidated results.

The Lighting Segment includes outdoor, indoor, and landscape lighting that has been fabricated and assembled for the commercial, industrial and multi-site retail lighting markets, including the petroleum/convenience store market. The Lighting Segment includes the operations of LSI Ohio Operations, LSI Metal Fabrication, LSI MidWest Lighting, LSI Lightron and LSI Greenlee Lighting.  The LSI Greenlee facility in Dallas, Texas was consolidated into the Company’s main lighting facility in Ohio in the second quarter of fiscal 2011.  These operations have been integrated, have similar economic characteristics and meet the other requirements for aggregation in segment reporting.

The Graphics Segment designs, manufactures and installs exterior and interior visual image elements related to image programs, solid state LED digital advertising billboards, and solid state LED digital sports video screens (LED video screens are designed and manufactured by the Company’s Lighting Segment and by LSI Saco in the All Other Category). These products are used in visual image programs in several markets, including the petroleum/convenience store market, multi-site retail operations, sports and advertising. The Graphics Segment includes the operations of Grady McCauley, LSI Retail Graphics and LSI Integrated Graphic Systems, which have been aggregated as such facilities manufacture two-dimensional graphics with the use of screen and digital printing, fabricate three-dimensional structural graphics sold in the multi-site retail and petroleum/convenience store markets, each exhibit similar economic characteristics and meet the other requirements for aggregation in segment reporting.

The Electronic Components Segment designs, engineers and manufactures custom designed electronic circuit boards, assemblies and sub-assemblies used in various applications including the control of solid-state LED lighting.  Capabilities of this segment also have applications in the Company’s other LED product lines such as digital scoreboards, advertising ribbon boards and billboards.  The Electronic Components Segment includes the operations of LSI ADL Technology.

The All Other Category includes the Company’s operating segments that neither meet the aggregation criteria, nor the criteria to be a separate reportable segment.  Operations of LSI Images (menu board systems) and LSI Adapt (surveying, permitting and installation management services related to products of the Graphics Segment) are combined in the All Other Category.  Operations of LSI Marcole (electrical wire harnesses) are included in the All Other Category, although this business was sold in March 2010.  Additionally, operations of LSI Saco Technologies (designs and produces high-performance light engines, large format video screens using solid-state LED technology, and certain specialty LED lighting) are included in the All Other Category.

The Company’s Corporate Administration activities are reported in a line item titled Corporate and Eliminations.  This primarily includes intercompany profit in inventory eliminations, expense related to certain corporate officers and support staff, the Company’s internal audit staff, the Company’s Board of Directors, stock option expense, certain consulting expenses, investor relations activities, a portion of the Company’s legal, auditing and professional fee expenses, and certain research and development expense.  Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes, and deferred income tax assets.

Summarized financial information for the Company’s reportable business segments is provided for the following periods and as of March 31, 2011 and June 30, 2010:
 
 
Page 10

 


   
Three Months Ended
   
Nine Months Ended
 
(In thousands)
 
March 31
   
March 31
 
   
2011
 
2010
   
2011
   
2010
 
Net Sales:
                           
Lighting Segment
 
$
46,711
   
$
35,458
   
$
141,676
   
$
118,787
 
Graphics Segment
   
10,537
     
10,900
     
57,407
     
52,321
 
Electronic Components Segment
   
6,212
     
4,014
     
16,053
     
11,661
 
All Other Category
   
1,168
     
3,094
     
4,148
     
7,747
 
   
$
64,628
   
$
53,466
   
$
219,284
   
$
190,516
 
                                 
Operating Income (Loss):
                               
Lighting Segment
 
$
2,195
   
$
(202
)
 
$
8,448
   
$
6,362
 
Graphics Segment
   
(80
)
   
(1,062
)
   
7,105
     
2,486
 
Electronic Components Segment
   
3,120
     
657
     
5,963
     
1,462
 
All Other Category
   
(522
)
   
(974
)
   
(889
)
   
(1,206
)
Corporate and Eliminations
   
(2,230
)
   
(2,233
)
   
(6,873
)
   
(7,488
)
   
$
2,483
   
$
(3,814
)
 
$
13,754
   
$
1,616
 
                                 
Capital Expenditures:
                               
Lighting Segment
 
$
697
   
$
549
   
$
2,854
   
$
1,654
 
Graphics Segment
   
49
     
1,607
     
137
     
1,963
 
Electronic Components Segment
   
242
     
53
     
658
     
537
 
All Other Category
   
11
     
79
     
39
     
89
 
Corporate and Eliminations
   
89
     
4
     
313
     
329
 
   
$
1,088
   
$
2,292
   
$
4,001
   
$
4,572
 
                                 
Depreciation and Amortization:
                               
Lighting Segment
 
$
955
   
$
924
   
$
2,855
   
$
2,791
 
Graphics Segment
   
496
     
505
     
1,510
     
1,516
 
Electronic Components Segment
   
238
     
234
     
702
     
617
 
All Other Category
   
60
     
97
     
189
     
332
 
Corporate and Eliminations
   
194
     
215
     
630
     
647
 
   
$
1,943
   
$
1,975
   
$
5,886
   
$
5,903
 
 

   
March 31,
   
June 30,
 
   
2011
   
2010
 
Identifiable Assets:
           
Lighting Segment
 
$
99,740
   
$
81,927
 
Graphics Segment
   
30,810
     
36,077
 
Electronic Components Segment
   
32,757
     
23,136
 
All Other Category
   
12,329
     
15,372
 
Corporate and Eliminations
   
5,066
     
C17,333
 
   
$
180,702
   
$
173,845
 

 
 
Page 11

 
Segment net sales represent sales to external customers.  Inter-segment revenues were eliminated in consolidation as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
March 31
   
March 31
 
(In thousands)  
 
2011
   
2010
   
2011
   
2010
 
                             
Lighting Segment inter-segment
                           
net sales
 
$
1,290
   
$
575
   
$
2,753
   
$
5,674
 
                                 
Graphics Segment inter-segment
                               
net sales
 
$
200
   
$
175
   
$
746
   
$
707
 
                                 
Electronic Components inter-segment
                               
net sales
 
$
9,873
   
$
1,275
   
$
18,701
   
$
3,978
 
                                 
All other Category inter-segment
                               
net sales
 
$
1,150
   
$
1,064
   
$
4,280
   
$
5,870
 
 
Segment operating income, which is used in management’s evaluation of segment performance, represents net sales less all operating expenses including impairment of goodwill and intangible assets, but excluding interest expense and interest income.

Identifiable assets are those assets used by each segment in its operations.  Corporate assets, consist primarily of cash and cash equivalents and short-term investments and refundable income taxes.

The Company considers its geographic areas to be:  1) the United States, and 2) Canada.  The majority of the Company’s operations are in the United States, with one operation in Canada.  The geographic distribution of the Company’s net sales and long-lived assets are as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
(In thousands)
 
March 31
   
March 31
 
   
2011
   
2010
   
2011
   
2010
 
Net Sales (a):
                           
United States
 
$
64,256
   
$
52,184
   
$
217,619
   
$
187,938
 
Canada
   
372
     
1,282
     
1,665
     
2,578
 
   
$
64,628
   
$
53,466
   
$
219,284
   
$
190,516
 

 
   
March 31,
   
June 30,
 
   
2011
   
2010
 
Long-lived Assets (b):
             
United States
 
$
48,456
   
$
48,220
 
Canada
   
250
     
345
 
   
$
48,706
   
$
48,565
 
 
a.
Net sales are attributed to geographic areas based upon the location of the operation making the sale.

b.
Long-lived assets include property, plant and equipment, and other long term assets.  Goodwill and intangible assets are not included in long-lived assets.

 
Page 12

 
 
NOTE 5 -  EARNINGS PER COMMON SHARE

The following table presents the amounts used to compute basic and diluted earnings per common share, as well as the effect of dilutive potential common shares on weighted average shares outstanding (in thousands, except per share data):
 
   
Three Months Ended
   
Nine Months Ended
 
   
March 31
   
March 31
 
   
2011
   
2010
   
2011
   
2010
 
                             
BASIC EARNINGS (LOSS) PER SHARE
                           
                             
Net income (loss)
 
$
2,115
   
$
(2,532
)
 
$
9,331
   
$
697
 
                                 
Weighted average shares outstanding
                               
during the period, net
                               
of treasury shares (a)
   
24,047
     
24,044
     
24,046
     
23,845
 
Weighted average shares outstanding
                               
in the Deferred Compensation Plan
                               
during the period
   
244
     
233
     
240
     
233
 
Weighted average shares outstanding
   
24,291
     
24,277
     
24,286
     
24,078
 
                                 
Basic earnings (loss) per share
 
$
0.09
   
$
(0.10
)
 
$
0.38
   
$
0.03
 
                                 
DILUTED EARNINGS (LOSS) PER SHARE
                               
                                 
Net income (loss)
 
$
2,115
   
$
(2,532
)
 
$
9,331
   
$
697
 
                                 
Weighted average shares outstanding
                               
                                 
Basic
   
24,291
     
24,277
     
24,286
     
24,078
 
                                 
Effect of dilutive securities (b):
                               
Impact of common shares to be
                               
issued under stock option plans,
                               
and contingently issuable shares,
                               
if any
   
72
     
--
     
45
     
7
 
                                 
Weighted average shares
                               
outstanding (c)
   
24,363
     
24,277
     
24,331
     
24,085
 
                                 
Diluted earnings (loss) per share
 
$
0.09
   
$
(0.10
)
 
$
0.38
   
$
0.03
 
 
 
 
(a)
Includes shares accounted for like treasury stock in accordance with Accounting Standards Codification Topic 710, Compensation - General.

 
(b)
Calculated using the “Treasury Stock” method as if dilutive securities were exercised and the funds were used to purchase common shares at the average market price during the period.

 
(c)
Options to purchase 1,837,945 common shares and 2,138,119 common shares at March 31, 2011 and 2010, respectively, and options to purchase 1,920,352 common shares and 2,021,633 common shares at March 31, 2011 and 2010, respectively, were not included in the computation of the three month and nine month, respectively, diluted earnings per share because the exercise price was greater than the average fair market value of the common shares.

 
Page 13

 
NOTE 6  -  INVENTORIES

The following information is provided as of the dates indicated (in thousands):
 
   
March 31, 2011
   
June 30,
2010
 
Inventories:
           
Raw materials
 
$
33,041
   
$
19,029
 
Work-in-process
   
7,364
     
8,891
 
Finished goods
   
15,130
     
12,162
 
   
$
55,535
   
$
40,082
 

NOTE 7 -  ACCRUED EXPENSES

The following information is provided as of the dates indicated (in thousands):

   
March 31, 2011
   
June 30,
2010
 
Accrued Expenses:
               
Compensation and benefits
 
$
6,879
   
$
6,725
 
Customer prepayments
   
1,261
     
2,233
 
Accrued sales commissions
   
1,203
     
884
 
Accrued Income Taxes
   
--
     
138
 
Other accrued expenses
   
2,566
     
3,277
 
   
$
11,909
   
$
13,257
 

NOTE 8 -  GOODWILL AND OTHER INTANGIBLE ASSETS

In accordance with Accounting Standards Codification (ASC) Topic 350, Intangibles – Goodwill and Other, the Company is required to perform an annual impairment test of its goodwill and indefinite-lived intangible assets. The Company performed this test as of July 1st of each fiscal year, with the last test performed as of July 1, 2010. The Company decided to change the annual testing from July 1st to March 1st in order to reduce administrative burden. The change from a testing date of July 1st to March 1st will result in two impairment tests in fiscal 2011 that are eight months apart. The Company also performs the test on an interim basis when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company uses a combination of the market approach and the income (discounted cash flow) approach in determining the fair value of its reporting units. Under ASC Topic 350, the goodwill impairment test is a two-step process. Under the first step, the fair value of the Company’s reporting unit is compared to its respective carrying value. An indication that goodwill is impaired occurs when the fair value of a reporting unit is less than the carrying value. When there is an indication that goodwill is impaired, the Company is required to perform a second step. In step two, the actual impairment of goodwill is calculated by comparing the implied fair value of the goodwill with the carrying value of the goodwill.

The Company identified its reporting units in conjunction with its annual goodwill impairment testing.  The Company relies upon a number of factors, judgments and estimates when conducting its impairment testing.  These include operating results, forecasts, anticipated future cash flows and marketplace data, to name a few.  There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment.
 
Due to economic conditions, the effects of the recession on the Company’s markets and the decline in the Company’s stock price, management believed that an additional goodwill impairment test was required as of June 30, 2009.  The impairment test performed as of June 30, 2009 was actually the Company’s annual goodwill impairment test that was to be performed in fiscal 2010 as of July 1, 2009; however, because the conditions that resulted in goodwill impairment were present as of June 30, 2009, the test was performed as of that date.  There were no triggering events in fiscal 2010 related to goodwill impairment testing and, as a result, there was no impairment of goodwill recorded in fiscal 2010.

Based upon the Company’s analysis as of July 1, 2010, it was determined that the goodwill associated with the four reporting units that contained goodwill was not impaired.  The goodwill impairment test in the Electronic Components Segment passed with an estimated business enterprise value that was $2.2 million or 10% above the carrying value of this reporting unit.  The goodwill impairment test in the All Other Category passed with an estimated business enterprise value that was $0.9 million or 84% above the carrying value of the reporting unit.  The goodwill impairment tests in the Lighting and Graphics Segments passed with significant and substantial margin (in excess of 600% and 150%, respectively).
 
 
Page 14

 

The Company performed a second annual goodwill impairment test, as of March 1, 2011, as a result of the change in the timing of the performance of the annual test as noted above. While the impairment test is not fully complete, management believes that the goodwill associated with the Company’s four reporting units is not impaired. The impairment test is expected to be completed in the fourth quarter of fiscal 2011.

The following table presents information about the Company's goodwill on the dates or for the periods indicated.
 
Goodwill
                             
(In thousands)    
             
Electronic
             
   
Lighting
   
Graphics
   
Components
   
All Other
       
   
Segment
   
Segment
   
Segment
   
Category
   
Total
 
                               
Balance as of June 30, 2010
                             
Goodwill
 
$
34,913
   
$
24,959
   
$
9,208
   
$
6,850
   
$
75,930
 
Accumulated impairment
                                       
Losses
   
(34,778
)
   
(24,701
)
   
--
     
(5,685
)
   
(65,164
)
   
$
135
   
$
258
   
$
9,208
   
$
1,165
   
$
10,766
 
                                         
Balance as of March 31, 2011
                                       
Goodwill
 
$
34,913
   
$
24,959
   
$
9,208
   
$
6,850
   
$
75,930
 
Accumulated impairment
                                       
Losses
   
(34,778
)
   
(24,701
)
   
--
     
(5,685
)
   
(65,164
)
   
$
135
   
$
258
   
$
9,208
   
$
1,165
   
$
10,766
 
 
Based upon the Company’s analysis as of July 1, 2010, it was determined that its indefinite-lived intangible assets were not impaired. The Company performed a second annual indefinite-lived intangible asset impairment test, as of March 1, 2011, as a result of the change in the timing of the performance of the annual test. While the impairment test is not fully complete, management believes that the indefinite-lived intangible assets are not impaired.  The impairment test is expected to be completed in the fourth quarter of fiscal 2011.

Based upon the Company’s analysis as of July 1, 2009, it was determined that an intangible asset with a net carrying value of $16,000 for a patent in the Lighting Segment was fully impaired and that an intangible asset with a carrying value of $137,000 for a trade name in the All Other Category was also fully impaired.  Accordingly, the Company recorded $153,000 of intangible asset impairment expense in fiscal 2010.

The acquisition of LSI ADL Technology resulted in the following amortizable intangible assets being recorded on the Company’s balance sheet as of the July 22, 2009 acquisition date:  customer relationships $2,880,000 (twelve year amortization period); technology $780,000 (ten year amortization period); trade name $460,000 (five year amortization period) and non-compete agreements $710,000 (seven year amortization period).  The weighted average amortization period of these four intangible assets is ten years three months.

 
 
Page 15

 
The gross carrying amount and accumulated amortization by major other intangible asset class is as follows:

   
March 31, 2011
 
Intangible Assets
 
Gross
             
   
Carrying
   
Accumulated
   
Net
 
(In thousands)       
 
Amount
   
Amortization
   
Amount
 
    Amortized Intangible Assets
                 
Customer relationships
 
$
10,352
   
$
5,545
   
$
4,807
 
Patents
   
70
     
45
     
25
 
LED technology
                       
    firmware, software
   
11,228
     
7,222
     
4,006
 
Trade name
   
460
     
155
     
305
 
 Non-compete agreements
   
890
     
293
     
597
 
     
23,000
     
13,260
     
9,740
 
                         
    Indefinite-lived Intangible Assets
                       
Trademarks and trade names
   
3,422
     
--
     
3,422
 
     
3,422
     
--
     
3,422
 
                         
Total Intangible Assets
 
$
26,422
   
$
13,260
   
$
13,162
 
 

                                                                                         
 
June 30, 2010
 
   
Gross
             
   
Carrying
   
Accumulated
   
Net
 
(In thousands)
 
Amount
   
Amortization
   
Amount
 
Amortized Intangible Assets
                 
Customer relationships
 
$
10,352
   
$
4,950
   
$
5,402
 
Patents
   
70
     
42
     
28
 
LED technology
                       
    firmware, software
   
11,228
     
6,043
     
5,185
 
Trade name
   
460
     
86
     
374
 
Non-compete agreements
   
890
     
198
     
692
 
     
23,000
     
11,319
     
11,681
 
                         
Indefinite-lived Intangible Assets
                       
Trademarks and trade names
   
3,422
     
--
     
3,422
 
     
3,422
     
--
     
3,422
 
                         
Total Intangible Assets
 
$
26,422
   
$
11,319
   
$
15,103
 
 
(In thousands)                         
 
Amortization Expense of
Other Intangible Assets
 
             
 
March 31, 2011
   
March 31, 2010
 
             
Three Months Ended
 
$
646
   
$
648
 
Nine Months Ended
 
$
1,941
   
$
1,908
 
 
The Company expects to record amortization expense as follows:  fiscal 2011 and 2012 -- $2,588,000 per year; 2013 -- $2,325,000; 2014 -- $619,000; 2015 -- $532,000; and after 2015 -- $3,029,000.
 
 
Page 16

 

NOTE 9  -  REVOLVING LINES OF CREDIT AND LONG-TERM DEBT

The Company has a $30 million unsecured revolving line of credit with its bank group in the U.S., all of which was available as of March 31, 2011.  The line of credit expires in the third quarter of fiscal 2014.  Annually in the third quarter, the credit facility is renewable with respect to adding an additional year of commitment, if the bank group so chooses, to replace the year just ended.  Interest on the revolving lines of credit is charged based upon an increment over the LIBOR rate as periodically determined, or at the bank’s base lending rate, at the Company’s option.  The increment over the LIBOR borrowing rate, as periodically determined, fluctuates between 175 and 215 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (EBITDA), as defined in the credit facility.  The fee on the unused balance of the $30 million committed line of credit is 25 basis points.  Under terms of this credit facility, the Company has agreed to a negative pledge of assets and is required to comply with financial covenants that limit the amount of debt obligations, require a minimum amount of tangible net worth, and limit the ratio of indebtedness to EBITDA (earnings before income taxes, depreciation and amortization). The Company is in compliance with all of its loan covenants as of March 31, 2011.

The Company also has a $5 million line of credit for its Canadian subsidiary.  The line of credit expires in the third quarter of fiscal 2012.  Interest on the Canadian subsidiary’s line of credit is charged based upon a 200 basis point increment over the LIBOR rate or based upon an increment over the United States base rate if funds borrowed are denominated in U.S. dollars or an increment over the Canadian prime rate if funds borrowed are denominated in Canadian dollars.  There are no borrowings against this line of credit as of March 31, 2011.

The Company assumed a mortgage loan with the acquisition of AdL Technology in July 2009.  Monthly principal and interest payments of approximately $10,000 are to be made through August, 2012 at an interest rate of 7.76%, at which time the balance is payable in full.  The real estate of LSI ADL Technology has been pledged as collateral for the mortgage.  The Company also assumed approximately $2.2 million of additional long-term debt with the acquisition of AdL Technology and paid it off at the time of the acquisition.
 
(In thousands)
 
March 31, 2011
   
June 30,
2010
 
             
Total mortgage balance
 
$
1,107
   
$
1,132
 
Less current maturities
   
34
     
33
 
Long-term debt
 
$
1,073
   
$
1,099
 

Maturities of long-term debt are as follows (in thousands):
 
Fiscal year ended June 30
       
2011
 
$
8
 
2012
   
34
 
2013
   
1,065
 
   
$
1,107
 
 
NOTE 10 -  CASH DIVIDENDS

The Company paid cash dividends of $3,606,000, and $3,606,000 in the nine months ended March 31, 2011 and 2010, respectively.  In April 2011, the Company’s Board of Directors declared a $0.05 per share regular quarterly cash dividend (approximately $1,202,000) payable on May 17, 2011 to shareholders of record May 10, 2011.
 
NOTE 11 -  EQUITY COMPENSATION

Stock Options

The Company has an equity compensation plan that was approved by shareholders which covers all of its full-time employees, outside directors and certain advisors.  The options granted or stock awards made pursuant to this plan are granted at fair market value at date of grant or award.  Options granted to non-employee directors become exercisable 25% each ninety days (cumulative) from date of grant and options granted to employees generally become exercisable 25% per year (cumulative) beginning one year after the date of grant.  If a stock option holder’s employment with the Company terminates by reason of death, disability or retirement, as defined in the Plan, the Plan generally provides for acceleration of vesting.  The number of shares reserved for issuance is 2,800,000, of which 672,109 shares were available for future grant or award as of March 31, 2011.  This plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, performance stock awards, and other stock awards.  As of March 31, 2011, a total of 2,158,989 options for common shares were outstanding from this plan as well as two previous stock option plans (both of which had also been approved by shareholders), and of these, a total of 1,214,114 options for common shares were vested and exercisable.  The approximate unvested stock option expense as of March 31, 2011 that will be recorded as expense in future periods is $901,100.  The weighted average time over which this expense will be recorded is approximately 19 months.
 
 
Page 17

 

The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model.  The below listed weighted average assumptions were used for grants in the periods indicated.

   
Three Months Ended
   
Nine Months Ended
 
     
3/31/11
     
3/31/10
   
3/31/11
   
3/31/10
 
                             
Dividend yield
   
--
     
3.09
%
   
2.97
%
   
3.09
%
Expected volatility
   
--
     
51
%
   
56
%
   
51
%
Risk-free interest rate
   
--
     
2.44
%
   
1.41
%
   
2.40
%
Expected life
   
--
     
4.3 yrs.
   
4.5 yrs.
   
4.3 yrs.
 
 
At March 31, 2011, the 288,200 options granted in the first nine months of fiscal 2011 to employees and non-employee directors had per share exercise prices ranging from $4.84 to $8.92, fair values ranging from $1.60 to $3.37 per option, and remaining contractual lives of nine years three months to nine years eight months.

At March 31, 2010, the 644,000 options granted in the first nine months of fiscal 2010 to both employees and non-employee directors had per share exercise prices ranging from $5.93 to $8.40, fair values ranging from $2.03 to $2.87, and remaining contractual lives of between nine years and eight months and ten years.

The Company calculates stock option expense using the Black-Scholes model.  Stock option expense is recorded on a straight line basis with an estimated 3.0% forfeiture rate effective July 1, 2010, with the previous estimated forfeiture rate having been 6.55%.  The expected volatility of the Company’s stock was calculated based upon the historic monthly fluctuation in stock price for a period approximating the expected life of option grants.  The risk-free interest rate is the rate of a five year Treasury security at constant, fixed maturity on the approximate date of the stock option grant.  The expected life of outstanding options is determined to be less than the contractual term for a period equal to the aggregate group of option holders’ estimated weighted average time within which options will be exercised.  It is the Company’s policy that when stock options are exercised, new common shares shall be issued.  The Company recorded $129,500 and $378,200 of expense related to stock options in three months ended March 31, 2011 and 2010, respectively, and $708,800 and $1,101,800 in the nine month periods ended March 31, 2011 and 2010, respectively.  As of March 31, 2011, the Company expects that approximately 918,098 outstanding stock options having a weighted average exercise price of $8.20 per share, intrinsic value of $618,383 and weighted average remaining contractual terms of 8.3 years will vest in the future.
 
Information related to all stock options for the periods ended March 31, 2011 and 2010 is shown in the table below:
 
   
Nine Months Ended March 31, 2011
 
             
Weighted
     
   
 
   
Weighted
 
Average
     
   
 
   
Average
 
Remaining
 
Aggregate
 
   
Shares
   
Exercise
Price
 
Contractual
Term
 
Intrinsic
Value
 
                     
Outstanding at 6/30/10
   
2,123,086
   
$
11.64
 
6.6 years
 
$
15,270
 
                           
Granted
   
288,200
   
$
5.29
           
Forfeitures
   
(245,297
)
 
$
11.22
           
Exercised
   
(7,000
)
   
8.40
           
                           
Outstanding at 3/31/11
   
2,158,989
   
$
10.85
 
6.6 years
 
$
704,471
 
                           
Exercisable at 3/31/11
   
1,214,114
   
$
12.94
 
5.2 years
 
$
56,346
 
 
 
Page 18

 
 
   
Nine Months Ended March 31, 2010
 
             
Weighted
     
         
Weighted
 
Average
     
         
Average
 
Remaining
 
Aggregate
 
   
Shares
   
Exercise
Price
 
Contractual
Term
 
Intrinsic
Value
 
                     
Outstanding at 6/30/09
   
1,537,212
   
$
13.07
 
6.4 years
 
$
33,800
 
                           
Granted
   
644,000
   
$
8.26
           
Forfeitures
   
(8,876
)
 
$
12.48
           
Exercised
   
--
   
$
--
           
                           
Outstanding at 3/31/10
   
2,172,336
   
$
11.64
 
6.8 years
 
$
106,455
 
                           
Exercisable at 3/31/10
   
1,054,936
   
$
12.98
 
4.8 years
 
$
13,498
 
   
The aggregate intrinsic value of options exercised during the nine month period ended March 31, 2011 was $6,526.  No options were exercised in the nine month period ended March 31, 2010.


Information related to unvested stock options for the nine months ended March 31, 2011 is shown in the table below:
 
             
Weighted
     
         
Weighted
 
Average
     
                           
       
Average
 
Remaining
 
Aggregate
 
   
Shares
   
Exercise
Price
 
Contractual
Term
 
Intrinsic
Value
 
Outstanding unvested
                   
    stock options at 6/30/10
   
1,071,875
   
$
10.32
 
8.4 years
 
$
10,193
 
                           
Vested
   
(366,700
)
 
$
11.92
           
Forfeitures
   
(48,500
)
 
$
10.52
           
Granted
   
288,200
   
$
5.29
           
                           
Outstanding unvested
                         
    stock options at 3/31/11
   
944,875
   
$
8.16
 
8.4 years
 
$
648,125
 

Stock Compensation Awards

The Company awarded a total of 4,876 and 4,456 common shares, respectively, in the nine months ended March 31, 2011 and March 31, 2010 as stock compensation awards.  These common shares were valued at their approximate $30,900 and $36,000 fair market values, respectively, on their dates of issuance, respectively, pursuant to the compensation programs for non-employee directors who receive a portion of their compensation as an award of Company common stock.  Stock compensation awards are made in the form of newly issued common shares of the Company.

Deferred Compensation Plan

The Company has a non-qualified deferred compensation plan providing for both Company contributions and participant deferrals of compensation.  The Plan is fully funded in a Rabbi Trust.  All Plan investments are in common shares of the Company.  As of March 31, 2011 there were 28 participants, all with fully vested account balances.  A total of 244,292 common shares with a cost of $2,497,348, and 224,884 common shares with a cost of $2,403,600 were held in the Plan as of March 31, 2011 and June 30, 2010, respectively, and, accordingly, have been recorded as treasury shares. The change in the number of shares held by this plan is the net result of share purchases and sales on the open stock market for compensation deferred into the Plan and for distributions to terminated employees.  The Company does not issue new common shares for purposes of the non-qualified deferred compensation plan.  The Company accounts for assets held in the non-qualified deferred compensation plan in accordance with Accounting Standards Codification Topic 710, Compensation – General.  For fiscal year 2011, the Company estimates the Rabbi Trust for the Nonqualified Deferred Compensation Plan will make net repurchases in the range of 21,000 to 23,000 common shares of the Company.  During the nine months ende